50/30/20 Rule: The Easy Budget Method That Works

Making a budget can help you pay down debt, boost your savings and get closer to your financial goals. But many of us never make a budget because…well, it doesn’t exactly sound fun. If the idea of counting every penny doesn’t appeal to you, the 50/30/20 budgeting method could be just what you need.

The 50/30/20 budget is a simple and flexible way of allocating your money so you can meet your financial obligations and save for the future without giving up the “extras,” such as dining out or traveling, that bring you joy. Keep reading to learn how 50/30/20 budgeting works, how to put the 50/30/20 method into practice, and whether this system will work for you.

How the 50/30/20 Budget Method Works

When you follow the 50/30/20 rule, roughly 50% of your income goes to meeting your needs, 30% to meeting your wants, and 20% to funding savings and paying down debt. Here’s a closer look at each of these categories.

Needs:

• Housing (rent, mortgage, property taxes)

• Utilities (phone, water, gas, electricity)

• Regular groceries

• Transportation (car, including fuel and maintenance; public transportation; parking)

• Medical care (health insurance premiums, copays and other payments, prescription drugs)

• Insurance (homeowners or renters insurance, car insurance)

• Childcare

• Minimum debt payments (the least you can pay to keep your accounts in good standing)

• Essential clothing (such as replacing worn-out or outgrown items)

Wants:

• Dining out

• Travel

• Entertainment (concerts, movies, nightclubs)

• Non-essential clothing purchases

• Cable TV or streaming subscriptions

• Gifts

• Splurge groceries (e.g., steak instead of hamburger)

Savings:

• An emergency fund sufficient to cover three to six months’ essential expenses

• Payments beyond the minimum on high-interest debt, such as credit cards

• Retirement plan contributions (401(k), IRA)

• Contributions to other tax-advantaged savings plans (Flexible Spending Account, Health Savings Account)

• Contributions to your children’s college fund

• Saving for a major goal such as buying a car or making a down payment on a home

How to Use the 50/30/20 Budget Method

If you’d like to give the 50/30/20 budget method a try, follow these steps to get started.

1. Determine your monthly net income.

Look at your pay stub to see your monthly net income after taxes. If money is taken out of your wages pre-tax (such as for retirement plan contributions or health insurance premiums), add this amount back into your take-home pay. When making your budget, you’ll allocate it to the appropriate category (needs or savings).

If you’re self-employed, an estimate is fine. You can get a general idea of your monthly take-home pay by reviewing your past year’s (or past few months’) income and subtracting the amount of taxes you pay.

2. Apply the 50/30/20 rule to allocate a dollar amount to each category.

Take your monthly net income and reserve 50% of that amount for your needs, 30% for wants, and 20% for savings. This will give you specific dollar figures to aim for in each category. For example, if you had a total monthly net income of $8,000, you would reserve $4,000 for needs, $2,400 for wants, and $1,600 for savings.

3. Track your spending.

Before implementing any budget, it’s a good idea to track your spending for a month or two. You can do this manually by reviewing your bank account every week and jotting down every expense in a notebook. If that sounds like too much hassle, some banks like LendingClub Bank offer their members a budget tracking app that helps you track and categorize expenses, analyze spending trends, and create a budget. Monitoring your spending will help you understand where your money goes.

4. Categorize your expenses.

The distinction between “needs” and “wants” can get hazy. How many pairs of shoes do you need? Is private school tuition essential, or extra? Is a bottle of wine “basic groceries” or a luxury? Only you can make these decisions. Once you’ve tracked your spending for a bit, review your expenses and decide which items are non-negotiable and which are just “nice to have.”

5. Monitor your spending.

After implementing the 50/30/20 budget rule, commit to reviewing your expenses every week. Staying on top of your finances will help you identify areas where you may be spending too much, so you can adjust your budget accordingly.

How a 50/30/20 Budget Might Look

How does following the 50/30/20 rule work in real life? Consider the example of a couple with a combined net annual income of $96,000, or a monthly net income of $8,000.

Here’s how their spending should break down:

$4,000 for needs – 50% x $8,000
$2,400 for wants – 30% x $8,000
$1,600 for savings – 20% x $8,000

Making the 50/30/20 Budget Work for You

Successful budgeting requires ongoing adjustments. Real life isn’t as neat and tidy as the budget you put on paper. Regularly review your spending, comparing your budget goals to your actual expenses. Then fine-tune your budget to get closer to that 50/30/20 ratio.

For example, if you find that you’re spending 40% on wants and 10% on savings, you’ll need to make some changes to get where you want to be. Discretionary spending is the easiest place for most people to cut back. Invite friends over for drinks or dinner instead of meeting up at restaurants or bars. If you’re not using it regularly, give up your gym membership and exercise at home or enlist friends to work out with you at a local park.

You may discover too much of your money is going to needs. This is the most difficult category to reduce, but you can start by looking for small changes that can pare down these expenses. For example, you could reduce water and electricity use to lower your utility bills, switch to a cheaper phone plan, or shop around for lower home and auto insurance rates.

In some cases, you might need to make bigger adjustments to bring your spending in line. These might include refinancing your auto loan, mortgage, or student loan to lower your monthly payment, or consolidate credit card debt. You might also need to make some sacrifices, such as moving to a more affordable apartment, taking in a renter, or finding alternative childcare arrangements. You might even decide you need to bring in more money by looking for a higher-paying job or changing careers.

Does the 50/30/20 Rule Work?

There are two big benefits of the 50/30/20 budget: simplicity and flexibility.

It’s simple: If you’re new to budgeting, starting with a simple approach can help ensure you stick with it. If you’ve tried more complicated budgets and abandoned them, the straightforward approach of the 50/30/20 system can make it easier to maintain.

It’s flexible: You don’t have to follow this budget rule to the letter. The 50/30/20 percentages can be adjusted to suit your financial needs and goals. In an area with a high cost of living, for instance, you may find a 60/20/20 ratio necessary to cover your essential expenses. Are you trying to save a down payment for a home? You might decide to spend 20% on wants and put 30% into savings until you achieve that goal.

Despite its advantages, the 50/30/20 budget approach may not work for all income levels. If you’re on a low income, it can be difficult to put 20% or even 10% of your income toward savings. This could be discouraging and might even tempt you to abandon budgeting altogether. Don’t give up; see if adjusting your ratios helps. Saving some percentage of your income, no matter how small, is better than nothing.

If you’re fortunate enough to be a high earner, devoting 30% of your income to “wants” could be excessive. You might be better off putting 30% of your income into savings and investments to build a financial cushion that can replace your income if you lose your job.

The Bottom Line

If you’ve ever reached the end of the month and wondered, “Where did all my money go?”, budgeting your income and tracking your expenses can give you the answer. Sticking to a budget will provide valuable insights that show whether your spending aligns with what matters to you.

The 50/30/20 budgeting method can help you allocate your income in a way that builds a solid financial future while still allowing room for fun. If the 50/30/20 method doesn’t suit you, there are many other budgeting systems to choose from. What matters isn’t the budgeting method you choose, but that you choose one and use it. For many people, the 50/30/20 rule is a simple and flexible budgeting method that’s easy to stick with.